Over the past two weeks we have looked at money, time, and risk. Financial planning is about organizing those to your advantage. At least not to your disadvantage.
All planning has two fundamental objectives.
It involves taking the money you earn now and allocating it to three time spaces. All the while recognizing the future may not play out as we expect.
Financial planning is the efficient allocation of the money you earn in the present to living as you wish today, satisfying obligations you have made in the past, and providing for the wants and needs of your lifestyle in the future.
Financial planning is about time balance.
You cannot plan what you do not understand. Just like with a rifle, you won’t hit targets you cannot see.
What is your vision of what you want from life over the long term?
Without that, all of what you do is like taking random shots and hoping you hit a target. You might, but results are better if you see the target, understand the range, adjust the telsecopic sight, and use proper posture, breath control, and trigger technique.
Know who you are and what you value.
What is your context? Where do you live in the world and what does that contribute by way of infrastructure and opportunity? What are your particular skills and limits? Who can help and who requires your help? When is the outcome to appear?
Know how your vision fits into the world around you.
Some people think practical economics is a contradiction, but they don’t understand the basis of economics. Economics deals with scarcity. If everything was plentiful economics would have no purpose. Everyone would have whatever they want.
Scarcity imposes limits. We all have limited resources. Time, money, and energy being the common ones. It is smart to find ways to deal with those limits.
If you have established a vision for your life and a rough idea of how the time frame works, you set out to balance your money resources in time, and address the risks that could alter the future from the expected path.
Conceptually, it really is as simple as that. Doing it is a bit harder, but keep the overview of the process in sight or you will end up in a weaker place.
Organizing in time, with resources at hand or to be received, and dealing with risks is doable if you recognize you cannot do everything at once. Priorities are necessary. They will make choosing tools and methods easier.
Earlier you clarified your vision for the future and the context wherein you will live. Priorities need some detail. You can capture the scope of the details by answering several simple questions. All start with “W”
What do I want? These are specific and relate to your life vision. There will be several, even many, of these. By clarifying the meaning of each what factor to you, you will be able to sort them in priority. Must have, want to have, would like to have.
What do I have to get those with? Could be money you have now or will receive later. More likely it will be money you will earn as you go and that involves the skill, time and energy resources. Your skill must be applied well to get the money. You can estimate the extent of the limits and decide to change them to your advantage where possible.
Who is involved? There will be two classes of people here.
Both groups add value and both groups have costs. Understand those.
When do I expect the outcomes to be available? Goals that are nearby in time will use different methods than those that are more distant. Time priority is an important observation. It affects risk
Where will I be? Worth considering a change if your local infrastructure does not support your purpose. Are their jobs available that will optimize your income given your skills, time, and energy? Is your place safe? Are opportunities expanding? Do you like the weather? Can you meet a mate?
There are many aspects. Think them through and decide.
Why these choices? Why questions forcing validation of some behaviour are almost always wrong. Why questions that relate to purpose and choices are almost always helpful. Why forces enough detail to make a good choice and it provides motivation in the future. For all long plans, like life plans, motivation is the key success predictor.
As a secondary benefit, why automatically creates why not. Why not is a time saver and time is a scarce resource. When people approach you with an idea that you could use money resources to acquire, prior why not decisions will automatically make it easy to dismiss, or easy to act upon. Many why not choices are time dependent. For example, I might choose debt reduction over investment in the beginning, or I might choose term life insurance over permanent life insurance because I have a high need and not much money for premium. Always understand your To-Do list and by extension, your To-Not-Do list
What if? Deals with risk. There are lots of those. Death, disability, loss of a job, divorce, death or disability of a spouse or child, government action adverse to your purpose, and dozens more. Life will not unfold as you expect. The future is like the past in some ways, but it does not repeat. new things appear in the next iteration and we cannot predict them all.
Have a fallback position for things that could appear. Be looking for the new and different. You can act best when you anticipate change.
When you address your income in the now, you know it is going to pay debt, to provide for the future and to provide for living now. Mnay people care about lifestyle, but forget to balance it with their future and their committments. There is a simple rule. You cannot save what you spend. A dollar is only good once.
If your present lifestyle is too rich, you have a problem with time balance. If it is too lean, you are missing things you can only do at this time of your life. Taking your children to DisneyWorld when they’re 29 is different from when they are 9. Spending too much on lifestyle is always wrong. Spending too little is sometimes wrong.
Effective planning is about organizing your choices to get the best set of tradeoffs, given what you are trying to do. Know what you want and balance that in time. Know how to decide and thus make tradeoffs.
Tomorrow we will look at efficiency.
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.
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